No power, no progress

No power, no progress
ekantipur, 20-Oct-08
RABINDRA NEPAL

Economic revolution is not possible when the country is reeling under an energy shortage

While economists around the globe are working on rigorous causality studies between energy consumption and economic growth, the recent government announcement of attaining double-digit growth has raised the eyebrows of domestic and international policy makers. No doubt, the concept of “double-digit” growth is a sweet surprise for a struggling economy. However, the timing of such an announcement appears to be overtly ambitious and rather spurious given the energy crisis the country is wallowing in. It also exposes the newly formed government's negligence in understanding that energy security is an urgent necessity to move the economy forward.

Like previous budgets, this year's budget also underscores the importance of the hydroelectricity sector for economic growth. This is not surprising as hydroelectricity remains and will remain the primary source of energy for the country in the foreseeable future.

Unfortunately, the sector has witnessed a distinct and deepening cleavage between theory and practice. As of 2008, the economy has an available capacity of generating 43,000 MW of electric power in economically efficient terms. Ludicrously, the installed capacity amounts to only around 611 MW after taking into consideration projects like Khimti, Bhote Koshi, Indrawati, Chilime and Kali Gandaki “A” pursued under private and public initiatives. The per capita residential electricity usage is about 65 KWh while only 39 percent of the total population benefits from using electricity.

However, that the annual growing demand exceeds the total supply implies that the power market exhibits excess demand. As a result, the system operator (Nepal Electricity Authority) is obliged to maintain a weekly power outage of more than 30 hours as a rationing mechanism. In recent years, consumers have also faced a steep rise in the electricity tariff. The tariff has increased from Rs. 5.50/KWh in 2001 to Rs. 7.50/KWh in 2008 making it one of the costliest in the world.

The inability of Nepal Oil Corporation (NOC) to meet its contractual obligations and make timely payments to the supplier keeps its supply ever vulnerable. Recently, the cash bust, state-owned and inefficient NOC has been provided Rs. 3 billion by the government just to ease the supply of petrol in the market. Transportation bottlenecks across the borders also threaten timely and adequate supply of fuel. More than 200 oil tankers are being used to bring oil from India into Nepal causing immense congestion at the border.

Nonetheless, the attitude of the current government towards the energy sector shows signs of urgency and demonstrates that Nepal remains a resource-rich but policy-poor state.

The Electricity Act of 1992 and the Electricity Regulations Act 1993 have been recently revised by the existing government with a 10-year target to generate 10,000 MW of electricity. While companies producing less than 3 MW of electricity have been exempted from license requirements, power plants generating less than 50 MW are not required to prepare environmental impact reports under the current revised policy. The former reform sounds promising in terms of reducing transaction and opportunity costs associated with unnecessary bureaucratic delays. Exempting firms from license requirements is also about reducing the regulatory burden and hence facilitating market entry.

However, the idea of exempting firms from environmental impact assessments can be seen as a short-term action to meet long-term objectives and has the potential to backfire in the long run. The failure to perceive environmental sustainability in tandem with energy policy can eventually prove to be a huge loss-making business to society. On the other hand, the government has no transparent and elaborate policy to attract foreign investment in hydropower generation from power-hungry neighbouring India and China. Though, the issue of Nepal being a net exporter of electricity to India in the future has been discussed at many forums, the reality is still harsh.

The government's recent decision to import an additional 60 MW of electricity to meet the power shortage is an epitome of the current energy crisis. However, the talk about constructing an oil pipeline connecting the Indian and Nepali markets can be perceived to be a very pragmatic and outward-looking energy policy of the current government. The estimated Rs. 1.6 billion project linking Raxaul with NOC's main terminal located 40 km away at Amlekhgunj will help ease petroleum supplies and reduce prices.

Though the Maoist-led government has shown some signs of a positive attitude towards sectoral reforms in energy and infrastructure, some unavoidable challenges and lucrative opportunities lie ahead. Huge investments are required in the capital intensive power generation industry to meet the estimated production target. One way to boost the level of investment would be through enhanced private sector participation.

Currently, so-called Independent Power Producers (IPPs) are generating 148 MW of electricity. Foreign investment from India and China will also allow for a positive spillover into the economy in terms of technology transfer, employment creation and economic growth as a whole. The Nepali government should cash in on Indian vested interests to invest in hydroelectricity. With demand for power increasing rapidly in India, Nepal's hydroelectricity generation has the potential to meet 10 percent of its electricity demand by 2016/17. Thus, creating a business-friendly environment with proper incentives, security and trust for both foreign and private investors is necessary to fuel investment in generation.

Incentives may take the form of lower taxation, higher profits and lower regulatory burden, but not at the cost of the environment. Increasing the wholesale power supply by involving multiple independent power producers will dilute the market power in generation making electricity prices competitive at the wholesale and retail markets.

Nepal's power market also lacks proper accountability and transparency. Separating transmission and distribution from the vertically integrated Nepal Electricity Authority would generate some degree of accountability, transparency and efficiency in the power sector. This may require formulation of concrete competition laws and laws to safeguard consumers against unwanted monopolistic behaviour. Also, privatization of the moribund and inefficient NOC is greatly needed to generate efficiency in the petroleum market. As old habits tend to die hard, the current government seems to be devoid of any immediate privatisation and liberalisation policies against the cash-strapped NOC. Rather than the government deciding the fate of firms, the baton should be passed to the market itself so that we have no room for inefficiency.